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Wednesday, October 28, 2015

Analysts predict grim outlook for Russian economy

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On October 26, 2015, at Washington’s Center for Strategic and International Studies, a panel discussion occurred centering around the future of the Russian economy and more specifically the large energy sector.
Featured at the event were Olga Oliker, head of the Russia and Eurasia Program at CSIS, Vladimir Milov of the Institute for Energy Policy, Ilya Ponomarev, the exiled State Duma MP and the only Duma MP to vote against the annexation of Ukraine’s Crimean peninsula, Ilya Zaslavskiy of Chatham House, and Sergey Aleksashenko of the Brookings Institution. Both Olga Oliker and Jeff Mankoff of CSIS thanked Free Russia Foundation for the idea of the event and invitation of leading Russian experts as panelists.
Vladimir Milov stressed the redundancies of the statements issued by Russian state officials regarding the state of the economy. The Russian economy, already under some strain from low oil prices, mismanagement, and international sanctions, could be headed for even harder times. Milov claimed there was no clear view for improvement of the economy when the sharp decline in domestic demand and consumer purchasing power wasn’t showing signs of improvement. Even in the 1990s, widely regarded both within and beyond the Russian borders as a time of runaway corruption, economic destruction, and weakness, domestic demand and consumer purchasing power was able to rebound.
Real wages and pensions in Russia are sharply declining due to the weak rouble. Low oil prices, by contrast, while certainly part of the equation, may not be as large a part of the economic decline as previously thought. The recession in 2008 also featured a large drop in oil prices, but back then the rouble was stable and there were no international sanctions to speak of.
Russia is also in an international credit rut. Today, in contrast to the economic problems in 2008, banks are much more cautious to lend money to Russia and Russians, even those who are not included on sanctions lists.
“We do not know who Russia will invade tomorrow”. Milov said referring to this reluctant mood.
Are these problems here to stay? It is often argued that a removal or phasing out of sanctions could give the economy a much-needed jump start, but the problems plaguing the Russian economy may be more deeply rooted than previously speculated. Further shocks to the rouble’s stability, already weak, could happen in the future and Russia’s service, industrial, and manufacturing sectors, while still operating very close to their pre-sanctions capability, could be forced to downsize in the future. State authorities, Milov claimed, had implicitly instructed these sectors to stay the course until things calm down.
Whether that stability will come is another question. Domestic car sales, for instance, have plummeted by 40 percent.
In Russia’s large energy sector, things also look grim. Oil fields in Western Siberia are depleted. Growth at the tip of the iceberg, in terms of smaller oil companies, is still present but not very substantial. Large companies with state investment such as Rosneft and Lukoil are starting to shrink.
Milov compared the situation to a matryoshka doll, in that the energy sector’s outlook seems to become progressively worse the further in it is examined.
How does Russia reverse this? The answer is simple-more drilling and investment, but the Kremlin’s look towards heavier taxes and overall under-financing of the industry could hurt that hope substantially. A similar policy, with similarly negative results, was undertaken by the Kremlin in the late 1980s under Premier Mikhail Gorbachev.
Budget spending could also be a liability down the road. The Kremlin wants to keep the budget where it is according to Milov, but they’re going to need more money to do that, and they may have to get it from taxes levied on the energy sector. If that happens, there’s a large possibility of the oil industry, still in the black at the moment, to fall into the red.
The federal budgets in 2012 and 2013 were allegedly geared to benefit wealthy Russians rather than teachers and healthcare workers.
When asked about his analysis, Mr. Milov stressed the overall atmosphere of uncertainty. In addition to higher taxes becoming a concrete policy enacted by Moscow, the idea of printing more money is also allegedly being mulled by the Kremlin. Over the last ten years, the Kremlin has stressed state investment as the primary way to grow the Russian economy. Unfortunately, since 2008, that growth has been minimal or nonexistent. It’s not corruption to blame, but what Milov claimed was “sunken capital”. Russia’s far eastern regions, for instance in the city of Vladivostok, have seen extensive projects with little use or benefit.
Next to speak was former A Just Russia State Duma MP Ilya Ponomarev. Mr. Ponomarev was exiled and branded as a traitor to his country when he became the lone MP to vote against the March 2014 annexation of Crimea.
Ponomarev, a far-left politician, began his remarks by claiming that the economic crisis in Russia didn’t start with the War in Eastern Ukraine, but the presidential election in 2012. Russia’s social safety net infrastructure, in addition to the public sector’s health, was not very good. The federal budgets in 2012 and 2013 were allegedly geared to benefit wealthy Russians rather than teachers and healthcare workers, Ponomarev explained. As a result, the regions became over-saturated with expenses they couldn’t pay for.
Ponomarev once represented the well-off city of Novosibirsk, Russia’s third largest city and the largest in Russia’s vast Asian region. Novosibirsk was well-off in terms of small business, but in the last few years has suffered from a much-smaller-than-needed budget, “Going from profitable to inept in one year” as he said. Capital expenditures ground to a screeching halt, hurting the regional economies and consumer confidence.
The perception of Siberians and Russians from the eastern areas also changed, he said, from good, loyal producers to “beggars, jumping high to receive subsidies”. To make matters worse, regional debt skyrocketed as well as interest, and state banks were unable to refinance or provide money to remedy the sick economy. Prices also increased.
Rather than blaming the incompetence or mismanagement undertaken by the government, Russia’s extensive media controls drove the blame towards the United States and Ukraine, or as Mr. Ponomarev phrased it, “Bloody America and the fascist Kyiv junta”.
This might be slowly but surely changing. Support for the War in Eastern Ukraine, once as high as 70 percent, has dropped to around 50%. On this subject, Mr. Ponomarev claimed that it would continue to drop but that protests were unlikely. Unlike the introductory speaker, he said that economic problems didn’t create social unrest in Russia on their own, even if they sometimes laid a foundation for it. Pension reform in the 2000s created nearly spontaneous large protests, some bigger than the infamous Bolotnaya protests, and the government had to step in and pump money back into the system to calm things down. In 1998, when Russia defaulted and the rouble was near worthless, protests were scattered at most.
What’s the political impact? Regional elections aren’t looking super hopeful for the ruling United Russia party. The Communist Party of the Russian Federation is gaining momentum in Siberia, even winning in Irkutsk, another comparably well-off region. Change, if it is to come, will happen in the developed regions rather than the depressed ones. United Russia will likely keep its majority but lose some seats in the 2016 Duma elections as opportunity pops up on the left side of Russian politics, but whether democratic forces will come into some power is still very much questionable.
The Kremlin seems stuck on ideas and proposals that the other members of the Eurasian Economic Union  are not interested in
Ilya Zaslavskiy of Chatham House suggested Russia may take advice from Iran and Belarus to relieve its economic rut, namely, to reach small but pivotal agreements with the United States and European Union while keeping the broad overall policies and rhetoric intact. Russia’s energy sector, however, has no clear policy to remedy its problems despite a lot of talk of closer ties with China and the chilling effect will remain a thorn in Russia’s side. The “obsessions” of “building pipelines around Ukraine and the new friendship with China” sound like the same old mistakes as the proposed North Stream may be delayed or cancelled if the EU does not choose to cooperate, and not many binding agreements have been made with the Chinese despite extensive effort and talks. Chinese banks have not been loaning Russia as much money as originally hoped.
To distract from that, Mr. Zaslavskiy floated the idea of another area of tension between Russia and the West: Central Asia. The Kremlin seems stuck on ideas and proposals that the other members of the Eurasian Economic Union (Kazakhstan, Kyrgyzstan, Armenia, and Belarus) are not interested in. Kazakhstan and Uzbekistan are both facing looming succession crises to their longtime strongman leaders Nursultan Nazarbayev and Islom Karimov, who are 75 and 77 respectively. In addition, Kyrgyzstan seems to be drifting towards a pro-Kremlin autocracy after flirting with democracy, and Tajikistan and Turkmenistan are under threats from the jihadist group Islamic State and its affiliates. Closer to home, the Kremlin is mulling the construction of a military base in Belarus and may decide to “protect its interests” in Moldova, where protests reminiscent of Ukraine’s Maidan Revolution are taking place.
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Like Mr. Ponomarev, Sergey Aleksashenko of the Brookings Institution was insistent that Russia’s economic problems have been festering since before the Ukrainian Conflict. He stressed the drop in investment and scathingly criticized the current administration, claiming Putin “destroyed the federation” by 2004 and “Humiliated property rights and the electoral process”.
At the same time, Aleksashenko firmly stated that despite the fact that the Russian economy was not going to collapse any time soon, prospects of growth looked grim. Many Russians point to the large growth the Russian economy saw during Putin’s first two terms in office, but the truth is that those seven years of growth have been followed by eight years of stagnation and decline. Furthermore, the Russian government’s use of reserve funds to prop up the rouble and the budget could have disastrous consequences. Even the usual refrains of bolstering the social safety net, long a campaign promise of many of the large Russian political parties, may be discarded in next year’s Duma elections.

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